Price of Carbon Set to Rise in EU as Supply of Permits Shrinks

(Bloomberg) -- The cost of pollution for businesses in Europe, already near an 11-year high, may rise further as regulators tighten the screws in the world’s biggest carbon market.

The European Union will withdraw almost a quarter of carbon dioxide emission permits in circulation from September through the end of August 2020 as part of reforms to shore up its Emissions Trading System. That means national governments will deduct 397 million of allowances from auctions, the European Commission said on Wednesday.

Price of Carbon Set to Rise in EU as Supply of Permits Shrinks

EU carbon prices rose more than five-fold over the past two years as lawmakers agreed to the special supply-control mechanism, or Market Stability Reserve, to reduce a glut. In the first year of operation it will have mopped up 16% of permits in circulation in the January-August 2019 period. The benchmark contract for December settled at 25.97 euros a ton on Wednesday.

The ETS, launched in 2005, imposes declining pollution caps on more than 12,000 facilities owned by power producers, airlines and industries from steel to cement makers. For every metric ton of carbon dioxide they discharge, emitters have to submit one emission permit, bought or received for free, or pay a fine. Companies that pollute less than their cap can sell excess permits, getting an incentive for going greener.

The stability reserve, aimed at alleviating a surplus of permits that pushed prices as low as 2.46 euros in 2013, will absorb a number of allowances each year until the accumulated glut falls below 833 million. The withdrawal rate is 24% until 2023, falling then to 12%. The number of allowances in circulation announced by the commission on Wednesday was 1.65 billion.

The EU will next publish total number of allowances in May 2020 to determine the exact amount to be placed in MSR in the September 2020-August 2021 period.

The ETS is the Union’s flagship tool to meet its climate objective of reducing emissions by at least 40% by 2030 compared with 1990 levels. As EU nations start discussing a long-term goal for 2050, some policy makers and experts call on governments to tighten the 2030 targets. That could mean a faster pace of pollution cuts under the ETS, putting further pressure on prices.

©2019 Bloomberg L.P.